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Group Affiliation and Default Prediction

88 Pages Posted: 12 Oct 2016 Last revised: 19 Nov 2017

William H. Beaver

Stanford University

Stefano Cascino

London School of Economics

Maria M. Correia

London School of Economics and Political Science

Maureen F. McNichols

Stanford University

Date Written: November 17, 2017

Abstract

Using a large sample of business groups from more than one hundred countries around the world, we show that group information matters for parent and subsidiary default prediction. Group firms may support each other when in financial distress. Potential group support represents an off-balance sheet asset for the receiving firm and an off-balance sheet liability for the firm offering support. We find that subsidiary information improves parent default prediction over and above group-level consolidated information possibly because intra-group exposures are netted out upon consolidation. Moreover, we document that the improvements in parent default prediction are decreasing in the extent of parent-country financial reporting transparency which suggests that within-group information matters most when consolidated financial statements are expected to be of lower quality. We also show that parent and other group-firms’ default risk exhibits predictive power for subsidiary default. Lastly, we find that within-group information explains cross-sectional variation in CDS spreads. Taken together, our findings contribute to prior literature on default prediction and have direct relevance to investors, credit-rating agencies and accounting regulators.

Keywords: Default prediction, Business groups, Consolidation, Financial reporting transparency, Credit spreads

JEL Classification: G12, G14, G15, G33, M41

Suggested Citation

Beaver, William H. and Cascino, Stefano and Correia, Maria M. and McNichols, Maureen F., Group Affiliation and Default Prediction (November 17, 2017). Stanford University Graduate School of Business Research Paper No. 16-46. Available at SSRN: https://ssrn.com/abstract=2850458 or http://dx.doi.org/10.2139/ssrn.2850458

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
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650-723-4409 (Phone)
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Stefano Cascino

London School of Economics ( email )

Department of Accounting
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 6457 (Phone)
+44 (0)20 7955 7420 (Fax)

HOME PAGE: http://www.lse.ac.uk/accounting/People/profiles/Cascino.aspx

Maria Correia (Contact Author)

London School of Economics and Political Science ( email )

Houghton St
London, London WC2A 2AE
United Kingdom

Maureen McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)
650-725-7979 (Fax)

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